Why oil may hold the key to the market’s next move

With crude prices dipping below $40 a barrel, it may take an oil reversal for stocks to make a big move higher.

"It would be very helpful to have oil bottom here in order to have stocks break out to the upside," Nick Colas, chief market strategist at Convergex, said on CNBC's "Trading Nation" on Friday. On Monday, oil fell below $40 a barrel for the first time since April.

"We have seen correlations kind of grind their way higher again, and they're not really overly high. But they have been climbing with the moves in oil tracking the S&P."

Energy makes up 8 percent of the S&P 500 and is currently one of the worst-performing sectors in the index. Crude oil and the S&P 500 have seen a correlation of 0.5 over the past 60 sessions, indicating a relationship that is a bit tighter than it has been on average over the past few years.

Given the way the market is performing, Colas said he thinks energy is still a good place to be as he sees oil in the process of bottoming out at around its current levels. "Against that backdrop the energy sector is a good place to put money," he said.

However Eddy Elfenbein, editor of the Crossing Wall Street blog, said he doesn't think it's necessary for oil to bottom out and go higher for stocks to perform well. "Given the correlations, it's possible to move higher without energy conforming," he said.

Elfenbein said he remains a bit more cautious on energy, especially the larger names. "Overall I'm not that optimistic for the sector."

About

Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J. Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell> (M-F, 3PM-5PM ET). In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.